Japan’s budget plan for next year may fail to achieve the government’s goal of spurring private demand, while making little progress on reducing the country’s debt, Shinkin Asset Management Co. said.
Prime Minister Naoto Kan will keep new debt sales at 44.3 trillion yen ($534 billion) in 2011 to finance a record budget of 92.4 trillion yen in the year starting April 1, according to a proposal approved on Dec. 24 by the Cabinet in Tokyo.
The Kan administration is trying to reduce a public debt burden about twice the size of gross domestic product, stimulate an economy hit by deflation and a strong yen hurting exporters, and bolster Social Security spending for an aging society. His latest budget plan may not do much to revive demand, said economist Hiroshi Miyazaki.
“The government barely scraped by getting revenue to match spending,” said Miyazaki, Tokyo-based chief economist at Shinkin Asset Management, which manages about $6 billion. The budget “doesn’t work to improve the state of public finances but it doesn’t do anything to spur the economy either.”
Kan’s budget and his plan to reduce the effective corporate tax rate by 5 percentage points will boost Japan’s GDP by 0.02 percentage point next fiscal year, the Nikkei newspaper reported on Dec. 25, citing calculations by its data service NEEDS.
Japan’s economy is expected to contract this quarter as government stimulus measures that bolstered spending expire and the strong yen threatens exporter profits. The government said on Dec. 22 it was forecasting growth to slow to 1.5 percent next fiscal year from 3.1 percent.
JVC Kenwood Holdings Inc., a Japanese maker of audio equipment, video cameras and televisions, last week said it plans to eliminate 500 jobs at its Victor Japan unit because the yen’s appreciation and Asian competition have reduced revenue.
The market’s reaction to Japan’s budget plan was limited. The dollar traded at 82.96 yen at 10:21 a.m. in Tokyo from 82.88 yen last week. Japan’s currency rose to a 15-year high of 80.22 last month. The Nikkei 225 Stock Average rose 0.4 percent to 10,324.88 at 10:22 a.m. The yield on the benchmark 10-year Japanese government bond was unchanged at 1.15 percent.
Japan’s fiscal situation means that not even domestic investors will be interested in 10-year Japanese government bonds should yields fall below 1 percent, said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages about $310 billion. “What’s most problematic is that there is almost no visible clue to how Japan will consolidate its finances,” Sera said.
Social Security Outlays
Total spending will increase 0.1 percent compared with this fiscal year’s initial budget.
Social Security outlays will rise 5.3 percent, while education and science-related spending will decrease 1.4 percent, public works expenditures will drop 5.1 percent, and the defense budget will shrink 0.3 percent, according to Kan’s plan.
Kan will submit the plan to parliament, where the main budget itself only needs Lower House approval according to Japanese law. However, other bills related to the budget including one to authorize bond issuance need the go-ahead of the Upper House, controlled by the opposition.
Resistance from the opposition parties may complicate Kan’s effort to enact the budget bills, at a time when Kan’s popularity is falling.
Passage in Parliament
“The biggest focus is not on the content of the budget, but on how the DPJ’s going to pass it in parliament,” Shinkin’s Miyazaki said. “But with the state of the Upper House, it’s unlikely the government’s plan as it is right now will remain intact as it goes through the negotiations.”
Kyodo News said yesterday that budget plan received a disapproval rating of 76 percent in its opinion poll. The Nikkei newspaper reported today that public support for Kan declined four percentage points from a month earlier to 26 percent.
Kan has pledged to keep bond sales unchanged for three years to lower Japan’s debt burden. The government expects new bond issuances will exceed tax revenue of 41 trillion yen for a second consecutive year. Receipts from levies have shrunk more than a third after peaking at 60.1 trillion yen in 1990.
The premier tapped some 7 trillion yen from unused accounts and reserves to pay for the plan, including money from a foreign-exchange reserves account and accumulated funds belonging to a government-affiliated railway agency. Finance Minister Yoshihiko Noda has said the government needs to find a more sustainable source of funds.
To meet Kan’s budget guidelines, the DPJ abandoned its pledge of doubling childcare handouts to households, limiting the increase to families with children under three-years old.
Yoshimasa Hayashi, a lawmaker of the opposition Liberal Democratic Party, said Kan’s spending plans are increasing the risk of a bond market collapse and his Cabinet needs to implement more aggressive measures to restore the nation’s fiscal health. “There are many worrisome spending initiatives” in the budget proposals, he said in a Dec. 20 interview in Tokyo.
The nation’s aging population is putting strains on its coffers. Social Security expenses, which have increased more than 60 percent since 2000, will account for 53 percent of general spending next year.
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